Co-operative Bank to freeze new business lending

24/05/2013

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On the day that markets plummeted both on the aftershocks from Japan and the threat that the US may stop printing money – sorry – quantative easing, the Co-Op bank announced that it would no longer be offering loans to new business customers. Could this be a signal that the morally sound yet financially slightly shaky Co-operative Group could be about to jettison certain parts of its financial services business.

Earlier this month, the credit ratings agency Moody’s downgraded the mutual’s banking arm to junk and their chief executive quit in response, the outlook has been pretty bleak for the Co-operative. The City was taken aback by the scale of its fall from creditworthy grace as Moody’s (who have proved fond of theatrical downgrades of late) whittled it down by 6 notches. Not only was this a reflection of deteriorating solvency, but the downgrade raised their own borrowing costs radically.

The bank had already withdrawn from negotiations to buy 632 branches from Lloyds as it battles with what is thought to be a capital shortfall of £1.8 billion. As it continues to interview for the chief executive position and struggles with the fallout of their merger with Britannia three years ago, it’s decision to curtail any new lending – at least temporarily at least shows a degree of sanity woefully lacked by the likes of RBS and Lloyds a few years ago.

It is thought that the catastrophic Britannia takeover saddled the Co-operative with up to £11bn of toxic debt. Co-op, a major provider of accounts to local authorities and charities who are drawn to its ethical practices has already begun to auction off its insurance business. It is now an open question as to whether more pruning of its financial services may be required to keep the overall group financially healthy.

The freeze however does not apply to personal accounts – or indeed to businesses who have an established credit history with the bank, but only to new customers and new ventures.